BIOS

So long to Canada's auto industry?

Audi CEO Rupert Stadler introduces the new Audi A3 on Monday, March 5, 2012 during a preview day at the 82nd Geneva International Motor Show in Geneva, Switzerland. (AP Photo/Frank Augstein)

Jeremy Cato, Autos.CTV.ca
Published Friday, April 20, 2012 1:24PM EDT

Here's what Audi AG CEO Rupert Stadler did NOT say about Canada this week: As a place to assemble new vehicles, Canada is simply not competitive. But Mexico…

"As an established car-making location, Mexico offers an excellent economic basis for Audi production operations," said Stadler, who chairs Audi AG's management board. Mexico, Audi officials added, is one of the world's top 10 automotive locations.

Thus, Audi, the big, profit-spinning luxury brand of the bigger Volkswagen Group, will start building an SUV – the Q5, reports Automotive News -- at an as-yet unnamed location in Mexico by 2016, the company said this week.

"Good infrastructure, competitive cost structures and existing free trade agreements played a significant role in the choice of Mexico," added Stadler.

There's a history here. VW has an existing automotive plant in Puebla, where it builds the Beetle and the Jetta, and an engine plant in Silao. For the record, VW recently opened a factory in Chattanooga, Tenn., to build Passats.

Canada? Nothing big to report on the automotive investment front, though a few weeks back Toyota announced a small expansion of its manufacturing operation in Ontario – adding some 400 jobs or so. But car companies in general are not investing big bucks in Canada and they're not likely to do so for the foreseeable future. In fact, DesRosiers Automotive Reports says Canada's share of North American production fell to 15.9 per cent of the North American total last year, a nine-year low.

"A number of all-new greenfield assembly plants have been announced for the U.S. and Mexico, so Canada's share of production will fall further over the next few years even if our assembly plants' mandates are renewed," says company president Dennis DesRosiers in a note to clients. He added that Mexico, "has emerged as the new darling of the North American automotive production scene, reaching 20 per cent of N.A. production in 2011."

This is all bad news for the Canadian Auto Workers. The CAW has just released a policy paper calling for a national auto strategy, one that might include what we can assume is a government-supported domestic car company and federal intervention to lower Canada's strong currency. Jim Stanford, the union's economist, told Bloomberg that the loonie represents "an enormous artificial cost penalty" amounting to $3.7 billion a year on auto parts made in Canada.

As Bloomberg notes, a 59 per cent increase in the Canadian dollar against its U.S. counterpart in the past 10 years has made Canadian factories less competitive globally. That's true.

What is somewhat harder to digest is the CAW's argument that labour costs in Canada are about $6 to $7 an hour lower than in the U.S., when, as Bloomberg notes, other factors are considered; prices for houses that can be 138 per cent higher and cars that an cost 20 per cent more in Canada. Stanford also said Canadian compensation is weighted more toward wages and pensions, while in the U.S. a larger portion is for bonuses and health care.

"We actually have a labour cost advantage in Canada but it's an overvalued currency that has converted that to an apparent cost penalty," Stanford told Bloomberg.

Regardless, the CAW argues that assembly line wages represents just 7.0 per cent of the manufacturing cost of a new vehicle and DesRosiers, also an economist by training, agrees. However, DesRosiers argues that a strict discussion of assembly line wages overlooks the bigger picture – total labour costs which "represent between 40 and 60 per cent of the cost of a vehicle (landed in your driveway) depending on the type and source of manufacture."

The other costs built into a new vehicle, notes DesRosiers:

* Wages embedded in the automotive parts used to make vehicles add 15 to 25 per cent to the equation;

* Wages embedded in raw materials add additional labour content;

* Wages paid by the vehicle distributors to market and sell vehicles and get them to the vehicle dealers;

* Wages paid by dealers to market, sell and keep their dealerships open.

"Add up all the 'wages' paid from the beginning of the value chain to the final selling price of a vehicle and they would represent at least 30 per cent of the final transaction price and as high as 50 per cent of the transaction price of a typical vehicle," notes DesRosiers.

Then add in benefits costs – pensions, health care and the like – along with research and development expenses, and "the labour content of a typical vehicle in North America is at least 40 per cent of its final transaction price and in some cases as high as 60 percent," notes DesRosiers.

The point is, car companies are global businesses and they chase lower costs all over the world. Where there are free trade agreements in effect, such as the North American one, investments can move about very easily. Audi is going to open a plant in Mexico to save money.

Nissan CEO Carlos Ghosn discussed this very issue last December in Tokyo at that motor show when reporters asked him about the strong Japanese yen. Earlier this month, Ghosn followed up on his December warning by announcing in New York that the high Japanese yen is forcing Nissan Motor to move Infiniti production out of Japan.

"You won't have to wait a long time before we make a decision about the new base for sourcing of Infiniti (Nissan's luxury brand)," Ghosn told a group of reporters. "If you follow our logic, we should make the cars where we sell them."

Nissan has announced plans to build a new $2 billion (U.S.) factory in Aguascalientes, Mexico. While Nissan has not said what models will be built there, Infinitis are on the radar screen. A Nissan plant in Canada is not.

The cold, hard truth is that Canada is not the destination of choice for cost-conscious car makers. For a long list of reasons, Mexico and the U.S. South are less expensive places to build cars within NAFTA.

If nothing else, give credit to the CAW for trying to spark a discussion about the future of an auto manufacturing industry that, as the CAW notes, employs 112,000 Canadians.